MakerDAO wants to protect itself from regulation. Especially in the light of the recent news earlier this week of a pegged project whose addresses were frozen. In order to do accomplish this, MakerDAO must depeg from the USD. They considered ETH and even its founder said WHOA, hold up a bit here – don’t back it up with 100% ETH.
The takeaway was that MakerDAO has to depeg but to where? ETH, yes, but at a maximum of 70% in the event that things go south at Ethereum. Well, that’s the plan the last I heard. But today we see someone else is jumping in to help.
Coinbase.
It would be interesting to see where this partnership is headed to! I’m glad good friends can still help a brother out, ay!
Generate Income From Idle Assets
The new approach is reportedly a strategic way of generating revenue from idle assets on MakerDAO’s balance sheet.
Coinbase has posted a proposal on the MakerDAO governance forum that would move 33% of Maker’s $1.6 billion Peg Stability Module (PSM) into a Coinbase Prime custody account, boosting Maker’s revenue by almost $24 million.
If approved, the proposal made by Coinbase would pay Maker a 1.5% yearly percentage yield of $528,000,000 USDC. Maker will also be able to mint, burn, withdraw, and settle its PSM allocations through Coinbase Prime almost instantaneously in USDC and will not be charged any custody costs for its PSM allocations to Coinbase.
Maker’s PSM was created to hard-peg the price of DAI to $1 and was released after the protocol’s peg saw a spike above $1 after the Covid crash in 2020.
This increased demand for loan liquidations due to ETH dropping more than 40% during the crash.
Cascade of Liquidations
Due to the under collateralization of numerous vaults caused by this market activity, there was a cascade of liquidations in the Maker Protocol.
A lot of other users also resorted to buying DAI heavily in order to pay off their debts and terminate their Maker Protocol positions which eventually led to DAI’s price rising above $1.
Despite the fact that PSM has been successful in maintaining DAI’s peg, one of the major issues raised on the forum by adcv, a pseudonym for a member of Maker’s strategic finance core team, is Maker’s capacity to invest its balance sheet successfully.
Maker’s current PSM asset allocation is “highly underinvested,” which “reduces the protocol’s ability to take a risk and its attractiveness as a stablecoin.”
Maker’s PSM Provides DAI Price Buffer
The new approach is reportedly a strategic way of generating revenue from idle assets on Maker DAO’s balance sheet.
PSM is a special module of the Maker Protocol to quickly exchange Dai for stablecoins at a 1:1 rate.
PSM also technically doubles as a special type of Maker Vault with a 100% Collateralization Ratio and 0% Stability Fee, as users are not asking for a DAI loan against their crypto.
In the event of external market shocks, Maker’s PSM also aims to provide bilateral buffer protection for the price of DAI.
The premium of DAI can be eliminated or slowed down by the anchoring stability module, which can immediately inject newly generated DAI into the market at a price of 1:1.
Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
